Editor’s note: Once a month The Mirror addresses five points about a key element of the state budget process. Today’s story looks at the Connecticut sales tax, its role in state finances, and its role in a dramatic tax reform plan proposed by the legislature’s Democratic majority.
Though it hasn’t been the single-largest source of state revenue since the income tax was enacted in 1991, the sales tax remains very important. Even though it now ranks second, the tax is expected to raise more than $4.2 billion this fiscal year, enough to cover nearly one-quarter of all general fund spending.
2) The sales tax is stable…
The budget deal that launched the income tax in 1991 also lowered the sales tax from 8 to 6 percent. Since then, the rate has changed only once, when it was increased slightly in 2011 to 6.35 percent.
While sales tax receipts have grown 26 percent over the past decade, the income tax — which has been increased three times since its enactment, will bring in 65 percent more this year than it did 10 years ago.
3) …And that’s not always a good thing.
Sales tax growth also has been tempered by surging online commerce. Though revenue officials did reach an agreement two years ago with Amazon.com to remit sales tax receipts, Connecticut — and most other states — still struggle to get other online retailers to do likewise.
The U.S. Supreme Court ruled in 1992 that a state cannot force businesses to collect sales taxes unless they have a physical presence within that state. A 2010 study by the Center on Budget and Policy Priorities, a nonprofit fiscal and public policy group based in Washington, D.C., concluded states were losing $7 billion annually in uncollected taxes tied to online sales.
4) A ‘swiss cheese’ sales tax?
Economist Fred V. Carstensen, who heads the University of Connecticut’s economic think-tank, frequently criticizes the state’s “swiss cheese sales tax,” arguing it unfairly creates too many winners and losers. That’s a reference to nearly 70 goods and services that are exempt from the tax or subject to a reduced rate, a policy that costs the state about $3 billion per year.
About 20 of those exemptions, worth $1.6 billion, assist consumers, sparing them from sales taxes on groceries, medications and medical equipment, textbooks, newspapers, child car seats and other goods.
Other sales tax exemption categories, and their annual cost to the state, include:
- Equipment and fuel for businesses and farms, $220 million.
- Various services for businesses and households, $720 million.
- Nonprofit organizations, $1.05 billion.
- Miscellaneous, $122 million.
5) Can the state lower property taxes by broadening the sales tax?
The legislature’s Finance, Revenue and Bonding Committee thinks so. The panel has a plan to lower the sales tax rate while raising more revenue overall — more than $1 billion — by ending about two dozen service exemptions.
Roughly $700 million would be sent to cities and towns. About $80 million of that would be used help more than 50 communities with the highest property tax rates cap or lower local taxes on motor vehicles.
Municipalities would have more flexibility to use the rest of those funds.